Topic 13

Integrated Reporting <IR> and Corporate

Governance - Part 2

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 Topic objectives

See CANVAS Modules Topic 11 “This week’s objectives…”

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 Differing views of business responsibility

Milton Friedman
• Saw the responsibility of business to use
resources to increase profits as long as it
stays within the rules (to engage in open and
free competition, without deception or fraud).
• Friedman rejects the view that corporate
managers have any moral obligations or
responsibilities. He notes (1962, p. 133) that
the belief in moral obligations and
responsibilities:
shows a fundamental misconception of the
character and nature of a free economy. In such
an economy, there is one and only one social
responsibility of business to use its resources and
engage in activities designed to increase its profits
as long as it stays within the rules of the game,
3 which is to say, engages in open and free
competition, without deception or fraud
 So, who is accountable?

If a large multinational is buying some of its products from this factory, should that multinational
make publicly available information about how the factory’s employee’s are being treated?
4 SOURCE: Shutterstock/Frame China
 So who is accountable? (cont.)

Do managers of a mining organisation have a responsibility and accountability for the various
social
5 and environmental impacts of their operations?
SOURCE: Shutterstock/Marianna Ivanovska
 Differing views of business responsibility

•Increasingly, entities are being held responsible for their social and
environmental performance as well as their financial performance
•Managers should manage the organisation for the benefit of all
stakeholders, not just those with control over scarce resources
•If we accept that an entity has a responsibility for its social and
environmental performance then accountants (or others) should
provide an account of social and environmental performance
•‘Accounting’ therefore, and somewhat obviously does not
have to be restricted to ‘financial’ performance alone
•With the changes in expectations about responsibilities of
corporations we have seen the emergence of forms of reporting
with a focus that is different from the focus of financial statements
•No single uniform approach for reporting adopted by all organisation
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 Other forms of corporate reporting
Description
Social reporting a component of corporate
social-responsibility
reporting, provides
information about an
organisation’s interaction
with, and associated
impacts on, particular
societies
Environmental reporting the communication of
environmental performance
information by an organisation
to its stakeholders.
Environmental reporting could
include documenting an
organisation’s impact on living
and non-living natural systems,
including its impacts on land, air,
water and ecosystems
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Examples
• interaction with the local
community
• level of support for
community projects
• level of support for
developing countries
• level of support for
employees within the supply
chain
• health and safety record
• training, employment and
education
• emissions of greenhouse
gases
• water usage
• release of effluents into
water courses, and
• results with respect to
minimising waste
 Accountability

• An organisation’s perspective about its accountability will directly impact on

what information (accounts) it provides
• If an organisation considers it only has a responsibility for its financial
performance, then it will tend to fixate on financial accounts/financial
accounting
• By contrast, if an organisation believes it has an accountability for its social
and environmental performance, then it will provide social and
environmental accounts/reports as well
• A definition of ‘accountability’ would be useful at this point:

Accountability involves two responsibilities or duties, these being

1. the responsibility to undertake certain actions (or to refrain
from taking actions), and
2. the responsibility to provide an account of those
actions Gray, Adams and Owen (2014)
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 International <IR> Framework (Jan 2021)

SOURCE: International <IR> Framework (Jan 2021)

9 www.integratedreporting.org
 International <IR> Framework (Jan 2021)

10 SOURCE: International <IR> Framework (Jan 2021)

www.integratedreporting.org
 <IR> : Through achieving integrated thinking

Strategic
focus on A strategic focus on the continued ability,
capitals quality and affordability of significant
capitals – both financial and non-financial…

Strategic
objectives …contributes to the organisation’s ability to
and value achieve its strategic objectives and create
creation over value over time…
time

…resulting in integrated thinking.

Integrated
thinking
1
1

SOURCE: Malaysian Institute of Accountants (2021)

 SOURCE: International

International <IR> Framework <IR> Framework

(Jan 2021)
www.integratedreporting.
org

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 The value creation process as depicted in
the <IR> Framework – Six Capitals

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 The value creation process in <IR> Framework – Six Capitals

14 SOURCE: International <IR> Framework (Jan 2021)

www.integratedreporting.org
 International <IR> Framework (Jan 2021) –
Seven Guiding Principles

15 SOURCE: International <IR> Framework (Jan 2021)

www.integratedreporting.org
 International <IR> Framework (Jan 2021) –
Eight Content Elements

16 SOURCE: International <IR> Framework (Jan 2021)

www.integratedreporting.org
 Why report (the motivations) (cont.)

To comply with legal requirements?

One reason why organisations might publicly report particular information
is that there is a legal requirement to do so. However, in the case of social
and environmental reporting this is generally not the case as there are
very few mandatory public reporting requirements.

There are however, some disclosure requirements, for example:

• Within accounting standards—not much, but consider AASB 116, AASB 137
• Corporate law disclosure requirementsModern Slavery Act 2018—in particular,
see Section 16 of the Act
• National Pollutant Inventory
• NGER Act
• ASX Corporate Governance Principles and Recommendations

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 Why report (the motivations) (cont.)

To forestall efforts to introduce more onerous

disclosure regulations?
• Another possible motivation for voluntarily producing social and
environmental performance information might be that the
management of particular firms, and officials within particular
industry bodies, introduce social and environmental reporting
policies in an endeavour to forestall the possibility of
government imposing potentially more onerous reporting
requirements upon them.
• Research evidence supports this motivation.

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 Why report (the motivations) (cont.)

To influence the perceived legitimacy of the organisation

• One motivation often cited for why organisations voluntarily produce information
about their social and environmental performance is a desire to maintain or improve
the legitimacy of the organisation
• Consistent with Legitimacy Theory, organisations are perceived to undertake actions,
including disclosing information, in an endeavour to appear legitimate to the societies
in which they operate
• Pursuant to Legitimacy Theory, accounting disclosure policies are considered to
constitute a strategy for influencing an organisation’s relationships with the parties,
or stakeholders, with which it interacts
• The organisation is seen as part of a wider social system in which the organisation’s
continued operation and success are dependent on it complying with the expectations
of the society in which it operates. Failure to comply with particular expectations might
lead to sanctions being imposed by society on the organisation in the form of legal
restrictions on its operations, limited provision of resources such as financial capital
and labour, and reduced demand for its products
• Much research supports the view that social and environmental disclosures are often
made to legitimise an organisation’s existence

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 Why report (the motivations)(cont.)

To manage particular stakeholder groups

• Under this perspective, the more critical the stakeholder
resources are to the continued viability and success of the
organisation, the greater the expectation that stakeholder
demands will be addressed (including demands for
information).
• Power in itself will be stakeholder/organisation-specific, but
might
be tied to such things as the stakeholder’s:
• command of limited resources (e.g. finance, labour)
• access to influential media
• ability to legislate against the company or
• ability to influence the consumption of the organisation’s goods and
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 Why report (the motivations)(cont.)

The belief that the entity has an ‘accountability’ to provide information

• One last motivation that we can consider, and one that ideally would
motivate managers to make disclosures, is that disclosures are
made because different stakeholders, particularly those most
affected by an organisation’s operations, have a right to know about
the activities and impacts of an organisation (and, importantly, about
efforts to minimise those impacts)
• While these slides have identified some possible motivations for
disclosure of social and environmental performance information, it
should again be emphasised that any given organisation might have
several motivations, some of which might not have been considered
above
• Because the disclosure of social and environmental information is
largely voluntary it is wise to consider what might be the underlying
corporate motivation for making the disclosure

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 How (and where) will the information be
presented?

• Because there is a general lack of regulation in the area of social and

environmental reporting, as well as an absence of an accepted
conceptual
framework for social and environmental reporting, there is much variation
in how this reporting is being conducted
• The financial statements including notes
• Financial accounting is often criticised on the basis that it ignores many of
the
externalities caused by reporting entities
• Externalities can be defined as:
• impacts that an entity has on parties (not necessarily restricted to
human beings) that are external to the organisation, parties
that typically have no direct relationship with the organisation
• Some of these effects or impacts relate to the social and environmental
implications of the reporting entity’s operations and include such things
as the
adverse health effects of pollution produced by the entity, or injuries caused
to consumers by the entity’s products, or the adverse social effects caused
22 by the retrenchment of part of a workforce
 Limitations of financial accounting (cont.)

Some of the perceived limitations of traditional financial accounting, which

acts to exclude these externalities, include:
• tends to focus on the information needs of stakeholders with a
financial
interest
• applies the ‘entity assumption’
• excludes from expenses the impacts on resources not controlled by
the
entity
• focuses on short-term results
• applies the recognition criteria of ‘measurability’ and ‘probability’
• applies the concept of ‘materiality’, and
• adopts the practice of discounting liabilities

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 Focus on short-term results

•As accountants, we tend to emphasise short-term (annual)

performance through our practices of dividing the life of the
asset up into somewhat artificial periods of time
•Managers are also often rewarded in terms of measures
of performance such as annual profits
•This can have the effect of discouraging us from making long-
term investments in new technologies (including those that will
provide longer term social and environmental benefits)
•This dissuades us from investment expenditure in more
sustainable modes of operation that might not generate positive
financial results for many years

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 Focus on risks

Climate-related and other emerging risks disclosures: assessing financial statement

materiality using AASB/IASB Practice Statement 2 https://
www.aasb.gov.au/admin/file/content102/c3/AASB_AUASBJointBulletin.pdf
April 2019

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 Other frameworks

Other frameworks have been developed, such as:

• The Global Reporting Initiative (GRI)
• Integrated Reporting <IR>
• Sustainability Accounting Standards Board (SASB)
• The CEO Guide to Task Force on Climate-Related Financial Disclosures (TCFD)
• The United Nation’s Sustainable Development Goals (SDGs)

Source: https://sdgs.un.org/goals

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 The United Nation’s Sustainable Development
Goals (SDGs)
The United Nation’s 17 Sustainable Development Goals:

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 Aligning SDGs to the Value Creation Process

Source: Carol Adams and www.integratedreporting.org

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 Aligning SDGs to the Value Creation Process

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Source: Carol Adams and www.integratedreporting.org